Low Fidelity

Somewhere, back in the USofA, I have a fantastic collection of music - pretty complete coverage of rock&roll's Golden Years of the 60s and 70s, and a pretty deep catalog of of jazz beginning with Charlie Christian, through Wes, Art Blakey, the Bird, Trane, Dolphy, straight through to 70s fusion and ending with Miles post-heroin days and the virtuousic Wynton Marsalis. Unfortunately, it is all on vinyl. On top of the racks LPs sits my hi-fi (pre-amp, amp, turntable, speakers, 100lb of sub-woofer and gold-plated cables). The electronics have come vary far, but the gear was all top-of-the-line Harmon-Kardon, preferred by many-an-audiophile for its representation as the best quality-to-price ratio outside the bespoke workshops of the odd Scottish-based nut-job.

But this post, while evoking memories of the many college late nights lost in the wonders of "Shakti", or the narcotic noodlings of "Blue Train", is neither about music nor wistful thoughts of timepermanently past. But it does intersect my kit, and Harman-Kardon, in particular. You see, there was a time in the 80s when an American company profitably making stereophonic gear was an anomaly. Technological change was rapid, and obsolencence and inventory write-offs a real problem. And the Japanese!!! Not only were they innovating at remarkable paces, but they were virtually giving it away. And in the late 80s, with the Japanese bubble, capital was "free" as their rates of financing were negative, allowing them to spend even more on R&D and mmanufacturing capex. Harman, miraculously survived, even as cassettes and turntables wen the way of the steam-engine. For Sidney Harman was an engineer at heart - a seeming rarity amongst company chiefs who rise to power from finance or legal backkgrounds. He treated his employees well, and they worked for him. Hard, allowing the company to weather hard times, and more importantly evolve. You're probably asking yourself: Was this in America, a CEO who cares about something more than this quarter's bopttom line, his gross-ups and the size of his errrrr ummm Golden Parachute?? He introduced high-end automobile systems that carried higher margins, and then, in a surfers' dream, caught the computer wave and became the minature PC speaker of choice with its sleek, modern designs and fine sound. Sales and profits rocketed in the late 90s and through the bubble burst.

Sales, profits, and more importantly, expectations, really took off in late 2002, carrying the stock price over the next few years to dizzying heights, and ever higher ratings, much to the chagrin my large-ish short position in the stock. Here was a company, in a business in which ratings historically were in the single diigits, where Japanese competitors - Pioneer, Nippon Columbia, Sanyo, Marantz, Yamaha, Matsushita, had all terminally wounded themselves in their audio business, but in Japanese fashion continuing out of some bizarre sense of pride and obligation, rather detached from reality. So while vultures (even Hong-Kong based Chinese ones) picked over what was left in Japan, Harman (and its stock) was valued at 25x future earnings and Sidney made the cover of just about every business magazine for the very same reasons Randians would vilify and mock him. Quelle histoire, n'est ce pas?

Well one day, earnings expectations were lowered, and a bit of the fluff went out of the share price, and at the same time every newly minted MBA who didn't want to get his hands dirty with such things as capacitors and resistors, wanted to be David Bonderman, or Henry Kravis. More importantly, the well-spring of lliquidity had a sprung a massive leak, one so large that if seen by a Saharan desert tribesman, he would think that "God Must Have Gone Crazy" or perhaps that it was a sign of the Devil's work, such an offense to his sensibilities. Yet, "Cov-Lite" DID exist, in prodigious quantities, again causing mayhem to those who dare short stocks, for each morning three more fine enterprises would find themselves the object of The Self-Annointed One's" attentions, spinning tall-tales of justification about "efficiency gains", "benefits to employment", "competitiveness" and other increduluous rubbish not seen since the days of Drexel Burnham Lambert, or, more recently, Henry Blodget.

Then, in a serendipitious event that one day might be captured on the silver screen, the Annointed Ones, replete with the foolishly provided capital, decided that Harman-Kardon would make a fine addition to their portfolio. $120 per share or so, it was agreed would be adequate compensation to turn the finest workplace in America, and most forward-looking management over to the bucaneers who would shred it to pieces and slash R&D in order to meet debt payments. Then, however, came July 2007. The buyers (Goldman Sachs Private Equity Group), got cold feet. Perhaps they could see the coming of The Great Unraveling". Or perhaps they jjust woke up on the wrong side of the bed. In any event, they used a disclosure loop-hole to walk away, without payhing the break-up fee. Harman fropped to from $120 to $75. And then, as the The Great Unraveling" began, and , well, unraveled, it dropped to $40,, levels not seen since long before I began shorting it (and getting toasted).

So what IS my point. Well I got to thinking: There were LOTS of deals that DID get done, and got done at prices as stupid,. if not MORE STUPID, foir companies of far-less pedigree and mettle than Harman-Kardon! IF Harman is now - according to the wisdom of market voting - worth $40, what, pray-tell, does that mean for the oodles of other, perhaps less-fortunate deals already consummated?? IF Harman is trading 33 cents of the proverbial dollar from the bid price, should their equity other investments perhaps be marked at something other than "Cost"? And what of the debt? Using a broken pencil and a coffee-stained back of the envelope, might such a move wreak havoc to the Annointed One's exit plan models? IF marked-to-market, mightn't such a move have wiped out the 15% equity put up by the Annointed Ones, blowing clear through to the Cov-lite loans, probably marked to "par" on the books of the erstwhile lender (i.e. The Sucker)??? IF the whole enterprise were deemed to be worth 33 cents on the dollar, and assuming valuations' sake that the debtholders are the new owners, and the market is willing to pay $40 for the debt-free enterprise, doesn't that leave the PE loans looking like they might be worth 50% of "par", instead of par? These are perhaps important questions worth contemplating.

Of course, I am NOT an annointed one, and am rather a simple soul, and there may be some very good answers as to why the PE boys should be marking their deals to "cost", and the lenders, should be marking their loans to "par", for IF the the Harman deal were done, and they were able to meet their interest payments, all is ok, no?? I have my doubts. It is the financial equivalent of Clinton's military "don;t ask- don't tell" policy. And it wasn't OK in the land of sub-prime, and it's unlikely to be OK in the land of credit card and auto receivables.

I miss my LPs, especially the ballads from all of Miles' quintet "Prestige" recordings, with the Monk, Garland, Chambers, Philly Joe Jones, just as I reckon lenders will wistfully hope for a return to the days when loans made at "par" were, generally worth "par" in reality.